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Supreme Court decision on Fringe Benefits Tax

22 May 2008

In a landmark decision, and the first of its kind on the fringe benefit tax legislation, the Supreme Court, restricting the levy, has extended relief for oil field operators. The decision, pronounced on May 6, 2008 holds that transportation expenditure for chartering employees from place of residence to the work place (rig) in India shall not be liable to Fringe Benefit Tax (FBT). <--break->


R&B Falcon ("Appellant") is an Australian company engaged in the business of providing Mobile Offshore Drilling Rig ("rig") along with crew and equipment on a charter hire basis. Typical modus operandi in the oil & gas business requires the Appellant to mobilize (transport) its employees from any part of the world to work on offshore rigs (in India) under harsh working conditions. The employees operate on a commutership basis, involving constant to and fro from residence to rig and back, since they work on 28 day cycles of "on" and "off" days. The Appellant has to incur significant costs for transportation of employees including air fare from the place of residence of an employee (which may be outside India) to a specified port in India and helicopter facility from the Indian port to the rig.

Question for consideration before the Authority of Advance Rulings ("AAR") and decision of the AAR

The Appellant filed an application for determination by the AAR on the limited issue of applicability of FBT on such transportation cost. The AAR by its order dated December 12, 2006, held that the Appellant shall be liable to pay FBT in respect of such transportation facility.

Aggrieved with the ruling of AAR, the Appellant preferred a Special Leave Petition before the Honourable Supreme Court of India.

Decision of the Apex Court

Applicability of exemption contained in Section 115WB (3)

  • Section 115WB (3) of the Income tax Act, 1961, ("the Act") specifically exempts expenditure incurred in providing free or subsidized transportation to employees, if such expenditure is covered under Section 115WB(1)
  • Section 115WB (1) (a) defines fringe benefits as any "consideration for employment" provided by the employer by way of any privilege, service, facility, amenity etc
  • The Apex Court held that the Appellant shall be governed by the provisions of Section 115WB (1)(a) of the Act, since expenditure incurred was necessitated by business needs and was, clearly "in consideration of employment"

Relevance of place of residence of employees

  • While interpreting applicability of the exemption, the court clarified that what is relevant is the nature and purpose of expenditure. Once it is established that expenditure has been incurred for transportation of employees from place of residence to place of work, it would be irrelevant whether such employees are flown from their place of residence within or outside India or how frequently such expense has been incurred. The term has to be given a wider meaning.

In summary

Specific finding by the Apex Court that expenditure incurred on transportation of offshore employees from country of residence outside India to offshore rig in India shall be a non-taxable benefit shall have far reaching implications on oil field service operators.

What is now left for tax payers is the task of substantiating before the assessing authority bonafides of an expense and its nexus to the business.

For more information, contact:

Bobby Parikh, Mumbai
T. +91 22 3021 7010

Mukesh Butani, New Delhi
T. +91 11 3081 5010

Abhishek Goenka, Bangalore
T. +91 80 4032 0100

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